2012 (11) TMI 1166 - AT - Income Tax

Disallowance u/s 14A - Held that - In the case of Godrej & Boyce Mfg. Co. Ltd. 2010 (8) TMI 77 - BOMBAY HIGH COURT has held that provisions of Rule 8D are applicable from AY 2008-2009 onwards. The provisions of Rule 8D are statutorily mandatory and any working of disallowance u/s 14A is required to be worked out as per formula provided in Rule 8D(2) only. As per the provisions of Rule 8D(2) the disallowance u/s 14A worked out to ₹ 340/- only whereas the appellant itself had offered disallowance u/s 14A at ₹ 5,64,531/-. AO was not justified in disallowing further expenditure of ₹ 34,68,900/- u/s 14A. The disallowance made by the AO is, therefore, deserved to be deleted.

Summary

Issues involved:
Interpretation of section 14A of the Income Tax Act regarding disallowance of expenses related to dividend income from shares held as stock-in-trade.

Analysis:
1. The Revenue filed an appeal against the CIT (A) order for the assessment year 2008-2009, challenging the treatment of opening and closing stock figures for disallowance under section 14A of the Act.
2. The Revenue contended that section 14A should apply even when no expenditure is incurred on dividend income from shares held as stock-in-trade, citing precedents. The appellant sought to set aside the CIT (A) order and restore that of the Assessing Officer.
3. During the proceedings, the Ld Counsel argued that dividend income from shares held as stock-in-trade should be exempt from section 14A, referring to a Karnataka High Court judgment. The Counsel presented relevant decisions supporting the assessee's position.
4. The Ld DR, however, supported the Revenue's stance, emphasizing that claiming exemption for dividend income while avoiding section 14A disallowances would be unfair. The DR acknowledged the Karnataka High Court judgment but disagreed with its application.
5. The Tribunal noted the settled position that section 14A does not apply to dividend income from shares held as stock-in-trade, as per the Karnataka High Court's direct ruling.
6. The Tribunal further elaborated on the Karnataka High Court's reasoning, emphasizing that earning dividend income from trading shares is incidental and not subject to section 14A. The Tribunal highlighted past decisions supporting this interpretation.
7. The Tribunal upheld the CIT (A) decision to delete the disallowance under section 14A, considering the average investment value and Rule 8D provisions. The Tribunal found the CIT (A) reasoning valid and in line with the law.
8. Consequently, the Tribunal dismissed the Revenue's appeal and the assessee's cross objection, affirming the CIT (A) order as legally sound and justified.
9. The Tribunal pronounced the order on November 21, 2012, concluding the matter in favor of the assessee based on the interpretation of section 14A and relevant legal precedents.